Revisiting the Financials of NVIDIA Corporation's Tegra

At its analyst day earlier this year, NVIDIA gave investors some insight into how the company's research and development spending is distributed among its various initiatives. The company said 75% of its $1.6 billion annual R&D investment goes toward stand-alone graphics processors for various applications. The other 25%, about $400 million, is directed to the company's Tegra family of mobile products.

Note that NVIDIA's SG&A spending has come in at about $456 million over the last 12 months.

Assuming that 25% of that SG&A spending goes toward the Tegra processors, then, at 50% gross margin, breakeven total sales for Tegra would be approximately $1 billion.

Does NVIDIA have a viable path to bringing this division to profitability?

Revising some older assumptionsLast year, I was optimistic that, of the $10 billion served addressable market that NVIDIA cited during an analyst presentation, the company had a reasonable path to getting this business to breakeven or better. Indeed, of NVIDIA's claimed served addressable market, I thought that grabbing at least 12% share wouldn't be too difficult.

However, things have changed.

NVIDIA exited the mainstream smartphone market following the underwhelming commercial performance of the Tegra 4i platform intended for this space. This obviously will lead to a significant reduction in research and development costs, but it also shrinks the company's total addressable market.

My view of NVIDIA's Tegra business is that it will generate revenue from the following sources:

High-end, gaming-oriented tablets

In-vehicle infotainment systems

Chromebooks

Various other Android devices

Let's take a closer look at this opportunity from a financial perspective.

Sizing up NVIDIA's potential marketsResearch firm IDC believes that shipments of "tablets plus 2-in-1" devices will come in at about 233.1 million units during 2014. Assuming the market grows at a 5% compound annual growth rate (this is my estimate) through 2017, then NVIDIA's addressable market in tablets for that year will be about 270 million units.

Additionally, NVIDIA asserts that it is on track to ship 25 million automotive-focused processors over the next five years. Finally, Gartner reportedly believes Chromebook sales will grow to approximately 17 million units by 2017.

It's hard to get a handle on how the scope of NVIDIA's other Android opportunities. As a result, for the sake of conservatism, it's probably best to exclude them from this analysis and view any such opportunities as potential for "upside surprise."

It's reasonable to expect that NVIDIA's Tegra processors for tablets and Chromebooks fetch about $25 per unit (although it wouldn't be a surprise if this number were a bit higher). In an earlier piece, I estimated that Tegra for automotive has an average selling price of about $50.

Running the numbersI assume NVIDIA will capture somewhere between 5% and 10% of the tablet market (since, to my understanding, NVIDIA's chips will only play in the premium portion of the market). I would expect similar market share for Tegra in Chromebooks.

The above assumptions imply revenue of between $359 million and $718 million from the tablet and Chromebook opportunities.

Finally, assuming an average selling price of $50 per solution in automotive, and assuming that by 2017, NVIDIA is selling to the tune of 5 million units per year, that's an additional $250 million per year.

So, it seems NVIDIA is likely to be able to hit breakeven in Tegra by 2017 if it can capture about 10% of the tablet processor market, hit its publicly stated shipment goals in automotive, and capture a modest portion of the Chromebook market.

Breakeven would be pretty sweetAccording to NVIDIA's most recent form 10-K filing, the company saw consolidated operating profit for fiscal 2014 of $496 million. However, the company's Tegra business actually lost $268 million.

If NVIDIA could just get its Tegra business to break-even and merely hold the line in its GPU business (NVIDIA has actually grown this business consistently over the last several years) then the company could generate in excess of $750 million in annual operating income by 2017.

The key takeaway, then, is that Tegra doesn't need to be great; it just needs to stop masking the strength of its core GPU business.

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